Stumble, Predict, Nudge: How Behavioral Economics Informs Law & Policy

I found this paper via the Legal Theory Blog, two researchers have put together a pretty good analysis of Richard Thaler’s, Nudge,  and Dan Ariely’s, Predictably Irrational. If your interested in understanding the strengths and weaknesses of Behavioral Economics and the new field’s potential impact on law and policy making this paper is for you. Hope you had a good weekend.

Abstract (Via SSRN)

Research in the field of behavioral economics indicates that humans stumble in their decision making in predictable ways that can often be corrected by a gentle nudge from the appropriate regulatory authority. Two new books–Dan Ariely’s Predictably Irrational and Richard Thaler and Cass Sunstein’s Nudge– recount the findings of behavioral research on predictable patterns in human decisionmaking and lay the foundation for regulation through choice architecture that recognizes these human stumbles.

In this Review Essay, we provide a critical account of remaining gaps in behavioral economics research and suggest that some types of behavioral insights may be better translated into law and policy reforms than others. We further argue that Nudge’s concept of “libertarian paternalism” both understates and exaggerates the jurisprudential and policy implications of regulatory innovation. While key insights from the behavioral field may lead to effective regulation systems with minimal intervention, these systems entail costs, have distributional effects, solve macro coordination problems, and are inevitably value driven. Moreover, policy nudges serve merely as a first stage of sequenced regulation where, inevitably, more coercive measures are required in later stages. The idea of choice architecture is then related to the growing body of regulatory studies collectively termed “new governance.” We conclude with a call for a more nuanced account of the range of mechanisms as well as the limits, costs, and consequences of applying lessons from the field of behavioral economics to law.

Introduction (Via SSRN)

To stumble is human. With every choice we make, individual motivation interacts with emotions, cognition, and social norms. Our decisionmaking stumbles are often the result of the ways in which information is presented and choices are constructed before us. Finding patterns of how we stumble and designing systems that can prevent common behavioral failures is the subject of the new field of behavioral economics which *2099 attempts to incorporate the vast knowledge accumulated by cognitive and social scientists into predictive models. The legal community in recent years has focused on creating policies that take into account the limits of human rationality. To do so, law has turned to developments in social science research because, as Richard Epstein recently wrote, “There is little doubt that the major new theoretical approach to law and economics in the past two decades does not come from either of these two fields. Instead it comes from the adjacent discipline of cognitive psychology, which has now morphed into behavioral economics.”

By understanding the ways in which individuals are susceptible to biases and flawed decisionmaking, law and policy can help improve individual and group behavior. Two new books–Dan Ariely’s Predictably Irrational and Richard Thaler and Cass Sunstein’s Nudge–bring together some of the most significant new research on human fallibility and lay the foundation for laws and policies that reflect an understanding of where humans stumble.

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25. January 2009 by Miguel Barbosa
Categories: Behavioral Economics, Curated Readings | Leave a comment

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